An infrastructure push does not lead to a boost to GDP

We’ve heard much these past few years about how now id just the time to have an infrastructure surge. It’s said often enough that a recession is just when we should be building all those roads, railways, council houses and the rest. Obama even tried to find those $800 billion worth of shovel ready projects just raring to do. With no great success it should be said.

This paper has examined whether major public investment drives in the past have served to promote or accelerate national economic growth. It is not about whether in theory public investment drives could accelerate growth, but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth.

The answer appears to be “probably very little”. This conclusion pertains to the drives – the big increases in public capital spending – not necessarily to routine levels of public investment. And furthermore the evidence here is not about whether public capital can promote growth by averting the emergence of bottlenecks. Major public investment campaigns continue to be advocated in several countries as a major trigger for economic growth, and on this issue, whether they have in fact triggered growth, the evidence for a positive effect of public capital on GDP or GDP growth is weak. … It is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite – major drives in the past have been followed by slumps rather than booms.

In theory it should work, in practice it doesn’t, which is a bit of a conundrum. The practical answer to which puzzle is that government is probably even worse at doing things than we generally think. Thus we’d probably be better off limiting it to that very small set of things that both must be done and that only government can do. Something which is a very small overlap indeed.

9 Responses to “An infrastructure push does not lead to a boost to GDP”

Welcome piece against the mantra chanted by so may self-serving producer interest in the UK – that increased (public) expenditure on infrastructure is a route out of recession. There has been no provan case in the whole of modern economic history where such a strategy has worked. Last inconclusive effort was huge tax-funded expenditure on infrastructure by Japan in the 1990s.. that helped didn’t it (not)?

The fact is that spending directs immediately valueable resources to produce something. The value of that something is all that remains to build the wealth of society. Votes are bought, but wealth is decreased.

(2) The theory of infrastructure investment is that it enables other activities by removing chokepoints. Think of roads from rural areas to cities, or between cities, enabling much more production and trade.

The fact is that politicians direct the infrastrure spending to union members who vote for them, not caring what is built. Or, politicians build wider roads and extensions to serve land and projects which they want to develop. This adds to the value of their private projects without enabling much additional trade.

Whether tax, borrow, or print, government spending directs current resources (food, housing, entertainment) toward building or creating something. The value of that spending is only what is produced plus vote buying. What is produced is usually small or useless. Valuable resources disappear; the project is all that remains.

As part of the US stimulus package, the US built thousands of sidewalks in the wrong locations. According to government accountants, this boosted GDP. We are all waiting now for the prosperity that is sure to come.

I invite the government to give me the money. I promise to quickly spend it all, thus doing my difficult and patriotic duty to multiply wealth for all.

A fantasy supports the idea that our government increases the wealth of our society when it borrows and spends. There is no wealth multiplier from the flow of money. If there were, we would all be living in Aruba by now as a result of huge government borrowing and spending.

What’s even worse is the large crowd of Neanderthals that appear out of the woodwork every time there’s a recession advocating infrastructure as a cure. The blindingly obvious flaw there is that it normally takes YEARS to get those projects going and completed, by which time the effect is to stoke the next boom.

In contrast, infrastructure projects which CLEARLY pay for themselves are fine by me – recession or no recession.

Infrastructure projects keep things ticking over that would cost more / uneconomical short term during the boom times.
We look at the last great recession we only got out of it following large amounts of state spending due to the creation of new technologies.
Now maybe that we need a similar drive however industry lacks the confidence to do such a task without taxpayers taking the risks.

If it really is cobblers then we would not be using jet powered aircraft to fly over the planet, nuclear energy, to power our homes or computers to calculate things or rockets to put satellites into space.
The point being these core technologies are nearly 70 years old and I admit their have been refinements and improvements we have not had any massive investment in the next big thing public or private.

Now if I am wrong please tell me where I will take any line such as you will work it out etc as evidence I am not wrong.

Living as I do in Huddersfield, right between Manchester and Leeds, I really am looking forward a big infrastructure spend in the area as proposed by several people including the chancellor.
Road and rail in the area is gridlocked most days. When I worked in Manchester I used to get the train at 06:45 just to make sure I got a seat and paid for a 1st class pass to hopefully ensure I got one going home at 16:30 as well. There are only 3 carriages on each train, when 6 wouldn’t be enough. But if we ever get them, they will be castoffs’ from “dawrn sowurth.” The railway to Sheffield needs to be fully rebuilt with new lines and tunnels, plus the southern motorway needs extending past Mottram to the M1, its time we up north got some graft spent on us, not just London. Maybe if we had had a similar spend over the years we would already be that Northern Powerhouse.